Bombay High Court

Cit vs Tata Chemicals Ltd. on 3 April, 2002

Equivalent citations: 2002 122 TAXMAN 643 Bom

Author: H Gokhale

JUDGMENT

H.L. Gokhale, J.

Heard Mr. Desai for the appellant. Mr. Vyas appears for the respondent.

2. This appeal, at the instance of the revenue under section 260A of the Income Tax Act, 1961 (hereinafter referred to as the Act), seeks to challenge the judgment and the order passed by the Tribunal dated 14-1-1999.

FACTS-IN-BRIEF

3. The facts leading to this appeal and the grounds raised therein are as follows :

The respondent is a public limited company engaged in the manufacture of chemicals, salt and detergents in its factories. One of such manufacturing units is at Mithapur in Gujarat. Subsequently, it set up a subsidiary company known as 'Tata Fertilizers', but this subsidiary company amalgamated with the respondent under the order of this court passed on a company application on 7-9-1989. The respondent thereafter set up a fertilizer plant at Babrala in State of U.P. Certain deductions were claimed by the respondent for the assessment year 1992-93. The assessing officer disallowed some of the deductions claimed, particularly those under section 36(1)(iii) and section 37(4) of the Act.

4. Being aggrieved by the order of the assessing officer passed on 24-3-1995, an appeal was preferred by the respondent. The same came to be dismissed by the Commissioner (Appeals) by his order dated 27-3-1996.

5. Being aggrieved therefrom, an appeal was preferred to the Tribunal which has come to be allowed.

6. Being aggrieved by that order dated 14-1-1999, this appeal is filed by the appellant.

QUESTIONS RAISED

7. Mr. Desai, the learned counsel appearing for the appellant, pressed questions of law framed at Serial Nos. (a), (b), (f) and (j) of the appeal memo. These questions read as follows :

(a) Whether the interest which is already capitalised in the books can be claimed as the revenue expenditure for the purposes of taxation ?

(b) When the three units are situated in different places and there is no functional integrity, common accounts, organic unity and further there is an ample evidence borne out by the record that the units were distinct and having its own entity, whether the Tribunal is justified in coming to the conclusion that the units are one and others are the extension/expansion of the other only on certain things which are not fundamental basis to the issue ?

(f) Whether the interest attributable to the borrowings for investments in tax-free bonds is allowable under section 36(1)(iii) of the Income Tax Act as the said borrowings are not for the purpose of business ?

(j) Whether the expenses incurred by the respondent towards maintenance of guest house can be allowed as deduction under section 37(4) ?

The rest of the questions though raised but were not pressed into service. Hence, our order is confined to the questions raised. The appeal on other questions stands dismissed as not pressed.

CONSIDERATION

Question (a)

8. As far as question (a) is concerned, it is not in dispute that this question was not raised before the Tribunal. Mr. Desai submitted before us that under section 260A(6)(a), it is permissible for the High Court to determine any issue which is not determined by the Tribunal. The careful reading of section will show that the High Court can decide only that question which was raised but not determined by the Tribunal. Therefore, it is necessary that the question sought to be raised ought to have been raised before the Tribunal and then if it has not determined it, one can say that it has not been determined by the Tribunal and, therefore, the High Court should look into it. In the present case, we do not find that this issue had been raised before the Tribunal. It is also not the case of the revenue that the issue or question was raised but not decided by the Tribunal. In the circumstances, we do not propose to dwell on this question.

Questions (b) and (h)

9. As far as question (b) read with question (h) is concerned, Mr. Desai took, us through the order passed by the assessing officer as well as by the Commissioner (Appeals), Mumbai and pointed out that both these authorities have come to the conclusion that this fertilizer unit will have to be treated as a separate unit and, therefore, the benefit under section 36(1)(iii) cannot be extended to the respondent as far as any amount of interest paid in respect of capital borrowed for the business of the fertilizer unit is concerned. Now, when one sees the order of the assessing officer, he has given emphasis on the solitary fact that the two plants; one at Mithapur, and other at Babrala are situated at two far-off places and that the operation of both these plants are neither inter-dependent for technology nor for inputs. He has observed that closure of plant at Mithapur would not in any manner adversely affect the operation of the fertilizer plant at Babrala.

10. This order of the assessing officer has been mechanically confirmed by the Commissioner (Appeals), Mumbai. As against this, the Tribunal has culled out the propositions of law based on various judgments of the Apex Court as well as of various High Courts in para 28 of its order. It has summarised propositions and determined the tests on the question of unity of business. They are as follows :

(i) The nature of the two lines of business is not relevant.

(ii) The fact that one business can be conveniently closed down without affecting the other business is a strong indication that both the businesses are distinct and separate. But no decisive inference can be drawn from the fact.

(iii) The decisive test is the unity of control which is indicated by interlacing, inter-dependence and inter-connection between the businesses and the dovetailing of one into the other. Such interlacing, inter-dependence or inter-connection can be shown to exist by reason of a common management, common administration, common fund and a common place of business.

The above propositions are culled out from the following judgments of the Apex Court :

(1) Setabgani Sugar Mills Ltd. v. CIT (1961) 41 ITR 272;

(2) CIT v. Prithvi Insurance Co. Ltd. (1967) 63 ITR 632;

(3) Produce Exchange Corpn. Ltd. v. CIT (1970) 77 ITR 739;

(4) Standard Refinery & Distillery Ltd. v. CIT (1971) 79 ITR 589;

(5) Hooghly Trust (P) Ltd. v. CIT (1969) 73 ITR 685; and

(6) B.R. Ltd. v. V.P. Gupta CIT (1978) 113 ITR 647.

The learned counsels appearing for the parties took us through the text of the various judgments referred to hereinabove and we are in complete agreement with the Tribunal that the above determined tests would be the correct approach to the questions with which we are concerned. The Tribunal while reaching to the conclusion has considered various factors such as administration of various units, flow of funds, unity of management, unity of the accounting set up as well as control coupled with various such relevant factors. The Tribunal also found that the administration and management of funds of two units is common. The Tribunal has also recorded finding of fact that there was a functional integrity between the two units. It is in these circumstances that the deduction under the particular section was held allowable.

11. The Tribunal has come to the conclusion that the decisive test is the unity of control which is indicated by inter-lacing, inter-dependence and inter-connection between the businesses and dovetailing of one into the other. In the present case, it is quite clear that the amalgamation of the subsidiary was allowed by the High Court. Thereafter, it is for the management of the company to manage its affairs and the benefit which would be available for the borrowings done for a unit would certainly be claimable by the company as such. Section 36(1)(iii) which permits the amount of interest paid in respect of capital borrowed for the purposes of the business will have to include the borrowing for a unit of the company which is what the fertilizer unit at Babrala is. Considering the fact that finding is based on appreciation of evidence brought on record, we do not find that this question can be said to be a question of law warranting adjudication by this court. In view of what is observed hereinabove, the questions of law raised in at (b) and (h) do not arise for our consideration.

Question (f)

12. We now turn to the question of law set out as (f), which raises a question as to whether the interest attributable to the borrowings for investments in tax-free bonds is allowable under section 36(1)(iii). As far as this deduction is concerned, the Tribunal has in para 66 of the order recorded a positive finding based on evidence that the investment in the tax-free bonds has been in the course of business. The Tribunal has observed that in the natural course of business, sometimes the assessee may have to park its funds in investments as a matter of prudence, relying upon the judgment of the Apex Court in CIT v. Indian Bank Ltd. (1965) 56 ITR 77 (SC). Mr. Desai submitted that the Indian Bank Ltd.'s case (supra) was concerning an expenditure claimed by the banking company. The assessee not being a banking company, the judgment of the Apex Court could not have been relied upon to consider the case of chemical unit. In answer to this, Mr. Vyas, learned counsel for the assessee-respondent, has drawn our attention to a subsequent judgment of the Apex Court in the case of Rajasthan State Warehousing Corpn. v. CIT (2000) 242 ITR 450 (SC), wherein the above referred proposition in the case of Indian Bank Ltd.'s (supra) has been approved. In the case of Warehousing Corpn., whose business was of warehousing the foodgrains and not of investment, such deduction on the same footing was permitted by the Apex Court. In these circumstances, the resolution of this question was based on facts since Tribunal has recorded finding of fact that the investment in question was a business investment. We do not find that this ground raises any substantial question of law for our consideration. The question sought to be raised, therefore, needs no consideration.

Question (j)

13. The last question (j) sought to be canvassed before us is whether the expenses incurred by the respondents towards maintenance of guest house can be allowed as deduction under section 37(4)? Now as far as this ground is concerned, para 71 of the order of the Tribunal is quite clear. The Tribunal has observed in this para as under :

"Ground No. 5 is directed against the disallowance of depreciation, salaries and food expenses in respect of the guest houses at Bombay. As regards depreciation, respectfully following the order of the Third Member in the case in Mahindra & Mahindra Ltd. v. Dy. CIT (1997) 61 ITD 129 (Bom-Trib), we hold that the depreciation cannot be disallowed under section 37(4) of the Act. The contention against the disallowance of the salaries and food expenses under section 37(4) is not pressed. Accordingly, the assessing officer is directed to modify the disallowance. The ground is partly allowed."

Thus, this para makes it clear that the Tribunal was following the judgment of the Tribunal in Mahindra & Mahindra Ltd. v. Dy. CIT (1997) 61 ITD 129 (Mum-Trib)(TM) and the contention against the disallowance had not been pressed. Since the contention of disallowance was not pressed, the same has not been dealt with by the Tribunal. Hence, question sought to be raised does not arise from the judgment of the Tribunal.

14. For reasons stated above, we do not find any merit in this appeal. The appeal is, thus, dismissed in limine with no order as to costs.